Business and management

HP and Autonomy

Conflicting accounts

Nov 20th 2012, 21:51by P.L.

IN AUGUST 2011, when HP said it would buy Autonomy, a British software company that specialises in analysing “unstructured” data, for $10.3 billion, many people thought the Californian maker of computers and printers had paid over the odds. On November 20th HP agreed that it had—and claimed that it had been duped. It said that it was taking a charge of $8.8 billion related to Autonomy in its fourth-quarter results, of which more than $5 billion was “linked to serious accounting improprieties, misrepresentation and disclosure failures”. Some of Autonomy’s former managers, it said (naming no individuals), had inflated the company’s figures before the acquisition.

HP says that it got wind of all this a couple of weeks after Mike Lynch, Autonomy’s founder and former chief executive (pictured), was forced out in late May. Autonomy had not performed as well as HP had hoped. Many other senior managers had already departed. According to HP, one of the remaining members of Autonomy’s management came forward and an investigation, which still continues, began. The accounting sleuths have, says HP, uncovered evidence that Autonomy bloated its sales, for instance by inflating revenue from software packaged with other firms’ hardware. HP spoke to the Securities and Exchange Commission in America and the Serious Fraud Office in Britain last week.

Autonomy’s ex-bosses have flatly denied the allegations. In a statement they noted that HP’s advisers (accountants from KPMG and bankers from Barclays and Perella Weinberg) oversaw “intensive” due diligence. “It is sad to see”, they added, “how [Autonomy] has been mismanaged since its acquisition by HP.”

You may wonder why, if there was jiggery-pokery at Autonomy, it took so long to come to light and went unnoticed by so many pairs of eyes. Autonomy was a listed company; Deloitte, its auditor, signed its accounts; HP’s advisers ran the rule over it; and the buyer’s board approved the merger. Most of today’s board were in place at the time. “We feel terribly about that,” Meg Whitman, the chief executive, told analysts, but “the board relied on audited financials.” She also noted that her predecessor, Léo Apotheker, and the then head of strategy, Shane Robison, “who led the deal” and were thus “the two people that should be held responsible”, had departed.

You may also wonder when the bad news from HP will ever end. Mr Apotheker was forced out a few weeks after agreeing on the Autonomy deal, having spent less than a year in charge: shareholders took fright not only at the purchase but also at his plan to spin off the company’s PC division. (Mr Apotheker has said he is “stunned and disappointed” by developments.) Ms Whitman, the former boss of eBay, has spent most of her tenure dampening expectations of a speedy recovery in HP’s fortunes. She has succeeded, after a fashion: the company’s share price has fallen by almost half since she took over (see chart). The Autonomy write-off was the second huge one in successive quarters: in July HP wrote down the value of EDS, an IT services company it had bought in 2008 for $13.9 billion, by $8 billion. In the fourth quarter it reported year-on-year declines in revenues from PCs, printers, services, servers­­­—just about everything, in fact, except software, where revenue was up by 14%. Despite everything, HP says it still considers Autonomy a decent fit.